The Commodity Connection: Rising Commodity Prices and the Outlook for Latin America and the Caribbean

As the world economy emerges from recession, it’s worth thinking about how the composition of this recovery, in terms of which countries expand faster, will affect commodity prices—and how those prices influence the outlook for economies of the Latin American and Caribbean (LAC) region.

Commodity prices usually follow a pattern of sizable declines in episodes of world recession, followed by some degree of recovery—and the current episode is no exception (Figure 1).

But within that pattern, what is notable is that this time the recovery of global activity is uneven, with emerging Asian countries already taking the lead, while the most advanced economies are recovering more slowly. Because the former countries consume relatively more commodities, this uneven composition of global growth is a key reason for the recovery recently seen in commodity prices, and for thinking that this will continue.

This pattern of commodity prices’ being sensitive to the condition of Asian economies is not new: the crisis in East Asia in the late 1990s sent commodity prices down, even while the advanced economies maintained growth. And in the early 1990s, when advanced economies had a downturn that was not shared by other countries, commodity prices avoided a big decline.

What does the recovery of commodity prices mean for economies of the region? Clearly it’s not welcome from the point of view of countries that are net importers of commodities, including, for example, most countries of Central America and the Caribbean. Many of these economies are already at a disadvantage these days, given their reliance on income from remittances or foreign tourism—both flows are sensitive to employment conditions in the United States and other advanced economies, which are expected to recover only slowly (Figure 2).

On the other hand, for net exporters of commodities—including the largest economies of the LAC region—the recovery of these prices is a piece of good luck. Still, these countries need to bear in mind that commodity prices are rarely stable and that their future path is always uncertain.

The implication is that fiscal policy should respond cautiously when commodity prices trigger big gains in government revenue, saving rather than spending revenue gains that are seen as temporary. The eventual reward to such fiscal caution comes when times turn bad, and prudent governments find that they are able to implement countercyclical fiscal policies—this is the topic of our next blog post.